14-Year Study Backs Sector Investing

Location isn't everything and the numbers prove it.

A newly released 14-year study by Morningstar Investment Management found that diversifying equity exposure across industry sectors versus geographic location is a more important factor for determining earnings and dividend growth across country indexes.

The globalization of business was cited as one of the main reasons for this phenomenon. As more companies operate globally, where they’re headquartered becomes less significant as a growth factor.

Industry sector funds are among the largest ETF categories by both quantity of funds offered and assets under management.

“The dominance of the industry factors in explaining differences in earnings and dividend growth is further demonstrated by the fact that the industry factors explain 56.2% and 49.2% of the variance in dividend and earnings growth, respectively, as measured by R-squared, suggesting that [a major cause of] differences in fundamental growth across countries stems from differences in their industry composition as opposed to their stock listing location by region,” reports Morningstar.

These findings examined global equity returns from 2000 to 2014 and may upend the way both advisors and investors go about obtaining portfolio diversification.

Traditionally, stock investors have diversified by allocating their money away from their local stock market into international markets. But since the benefits of region diversification are limited according to the study, emphasizing sector diversification, particularly in developed markets, is a must.

Source - thinkadvisor

Now is a ‘Very Good Time’ to be Considering Structured Products

Structured products have been in SA since the 1990s, however they do have the reputation of being expensive.

With me in the News Leader studio to tell us why he thinks they’re suitable for investors looking for offshore exposure, in these volatile times, is Kenric Owen, head of structured products at Investec Bank.

Kenric Owen, Head of Structured Products at Investec, speaks to Leigh Roberts about how structured products can protect investors in volatile market conditions.

World Markets Are In Freefall - So What Does This Mean For You?

Investors didn't like what they saw come Monday morning: The market had dropped more than 1,000 points to start the day after a news-worthy decline last week. China was to blame: A decline in the Chinese stock market and fears of the Chinese economy sparked the sell-off that we watched in horror on our home court of Wall Street.

We're the first to admit: It is absolutely unsettling news for investors of both long term and short term investment, and those of us approaching retirement with a 401(k).

Donald Trump weighed in that people should be concerned, and a lot of people were downright terrified to look at their 401(k) to see how much it had fallen.

But let's take a step back. Deep breaths.

Analysts maintain that people need to hold off on pushing the panic button, especially if they're in the market for the long-term and if they did a great job of diversifying their portfolio to mitigate against this type of risk.

That's not to say that this freefall isn't a great wake-up call for some of us. So what might you learn from it?

First off, back to the basics. Bob French, director of investment analytics with Virginia-based McClean Asset Management Corp., says to remember that markets are efficient, and that it's not prudent to try and trade in and out based on what's happening in the market today. He previously worked at a mutual fund company, and during the 2008 financial crisis, there were a number of advisors whose clients cashed out a week before the bottom of the market - even though that's easily the worst-case outcome for anyone.

Yes, baby boomers, this includes you.

"For someone over 50, you still have a long time period to be working with here," he says. "If you look at the historical data over a long term, things tend to go up. That's because capitalism works. Investors wouldn't put their money in the market without an expected return associated with taking that level of risk."

The current fiasco wasn't unexpected.

"We expect to see moves like this every once in a while," French says, admitting though that, "This is a big one. But if you look back historically, it's not unprecedented by any stretch of the imagination. You need to develop your asset allocation based on the assumption that you're going to see stuff like this, and that you're going to see real bad days, real bad weeks, real bad months, and real bad years. What you need to figure out when you're developing that asset allocation is what you can actually tolerate."

So if you're looking at the sad realization that your portfolio doesn't have the tolerance to handle this China disaster, reevaluate. And don't do it lightly.

"It's something you should think very hard about for a little while before making any changes to your portfolio, considering that you thought out your asset allocations prior to this happening," French says. "You want diversification. It's the only free lunch in finance, to pick up that old cliché."

French says there's no right asset allocation, but there are a lot of wrong ones. Investments shouldn't be about shooting for the high score. What's a wrong allocation? French says it's hard to pick one, but an easy choice is someone looking for a quick fix.

"You have to take what the market gives us," French says. "The market has rewarded long-term investors. So for folks focusing on the short term, events like this are going to hit very hard."

French recommends people talk to a financial advisor to make sure they're on the right track with their portfolio. He says it's difficult to predict when the market drop is over because the market reacts very quickly to new information.

"Until we're able to predict the future, we prefer to stay the course and focus on the long term," French says. "We try to get people wherever they need to go with the lowest amount of risk to deal. It's not a fun time in the market by any stretch of the imagination, but it all comes down to focusing on that long-term prospective and making sure that you're comfortable with what you're doing and why it is you're doing this."

Source - huffingtonpost.com

Here's Why the Ringgit is Getting Whacked...Again!

New 1MDB fears whack the ringgit

Asian currencies were broadly stable on Wednesday as China's monetary stimulus injected some calm into tense markets, but not the ringgit.
The Malaysian currency nosedived nearly 2 percent against the greenback in late morning trade to seventeen-year low for the fourth day running , unable to get any relief from China's interest rate and reserve requirement cuts that stabilized other emerging market currencies on Wednesday.

Fresh developments regarding state investor fund 1Malaysia Development Berhad's (1MDB) saga were to blame for Wednesday's plunge. Abu Dhabi's International Petroleum Investment Co (IPIC) is reportedly considering exiting a plan to help restructure 1MDB's debts, Singapore's Business Times reported earlier in the day.

1MDB, known for its investments in Malaysian power assets, is wholly owned by the government, which makes Prime Minister Najib Razak's administration responsible in the case of a default.

In May, IPIC signed an agreement to inject $1 billion into 1MDB to help pay off a $975 million loan to a syndicate of international lenders due in September. The agreement was hailed by Kuala Lumpur as a momentous step towards reducing 1MDB's total $11.6 billion debt overhang and advancing the fund's long-awaited restructuring plans that are due to be implemented early next year.

Read More - Why investors are snubbing Malaysian 'bargains'

In a statement on Wednesday, 1MDB denied that the binding agreement with IPIC was off, adding that it remains in discussions to conclude the [$1 billion] transaction. That saw the ringgit pare losses to around 0.7 percent but still trade below the key 4.3 level per dollar.

Wednesday's report adds to 1MDB's ongoing legal woes . The fund is currently being investigated by local officials for alleged corruption after the Wall Street Journal reported in July that $700 billion was transferred to Prime Minister Najib Razak's personal bank accounts. This week, Swiss officials launched criminal proceeding against two 1MDB executives for suspected money laundering.

Worries that 1MDB will default has dogged foreign investor sentiment since late last year and helped push the ringgit 22 percent lower year-to-date, making it Asia's worst-performing currency.

"Everybody's revising down their forecasts for the ringgit...Right now, we're in a panicky situation and nobody wants to touch it, " Jesper Bargamnn, head of trading for Nordea Bank in Singapore, told CNBC.

But the net oil exporter's finances are already strained amid lower oil prices and sliding currency holdings. International reserves are currently at their lowest level since 2009, making Kuala Lumpur especially vulnerable among emerging markets to a looming U.S. interest rate hike and Chinese economic slowdown.

If the Business Times report is true, the exit of IPIC would sap remaining investor confidence in 1MDB and likely usher in fresh blows for the ringgit, which has already been buffeted by China's recent renminbi devaluation and an external debt pile that tops 60 percent of gross domestic product (GDP).

Since Kuala Lumpur has quashed the idea of imposing capital controls, hiking interest rates seems to be the only option available for authorities to stem the currency's sharp depreciation, said Mirza Baig, head of foreign exchange and interest rates strategy for Asia at BNP Paribas.

Source - CNBC

Six Facts About China's Stock-Market Crash You Need To Know Now

More Chinese people have been investing in the economy than ever before. And, generally speaking, that is a good thing. Economists credit the growth of China's middle class — and thus, its increased participation in the market— as part of what has helped the country's stock exchange reach record heights. But that increased participation is also linked to the Chinese market's crazy fall that began in July and only seems to be getting worse.

The ins and outs of the crash are difficult even for economists to understand. At first, it seemed that the turmoil would remain in the purview of professional investors and people with tons and tons of money to spend. Now, there's talk of rollover to emerging markets, like Russia's or Brazil's.

What we want to know, of course, is how China's crash will affect what we have in our pockets. Is this crazy, headline-dominating downturn something we need to consider when we think about our personal finances for the foreseeable future?

Professor Ann Lee, a leading expert on the Chinese economy who has taught at New York University and China's Peking University, stepped in to help Refinery29 readers make sense of the mess.

THE ECONOMY IS WHAT HAPPENS IN EVERYDAY LIFE.... WHAT HAPPENS IN THE STOCK MARKET IS JUST A BUNCH OF TRADERS WHO DECIDE WHAT [PRICE] THEY WANT TO BUY A STOCK AT.

ANN LEE, NEW YORK UNIVERSITY FINANCE AND ECONOMICS PROFESSOR

Fact No. 1: The Chinese economy is not the same as the Chinese stock market.

"The economy is what happens in everyday life, in all of your transactions," Lee tells Refinery29. "You go out and you buy a cup of coffee from Starbucks — that's a transaction. Then you go and take the subway — that's another transaction. All these little transactions make up your economy and your economic growth.

"What happens in the stock market is just a bunch of traders who decide what [price] they want to buy a stock at. What they're basing their buying decisions on are just a lot of perceptions of what they think will happen in the future. Perceptions are merely perceptions. They aren't necessarily based on fact. Sometimes it's an accurate prediction, and sometimes it's not," she clarifies.

Fact No. 2: China's stock market is relatively new, and is unsophisticated in comparison to the United States' stock market.
Lee says that a big portion of participants in the Chinese stock market are "retail investors." Retail investors are people like you and me who open their own stock brokerage accounts, as opposed to those who manage money for a living. It's the difference between you and your uncle who works on Wall Street.

"A lot of retail investors are not sophisticated investors. They like to jump in if they think that they can make a quick buck. They don't know how to do discounted cash flows or read balance sheets necessarily... They probably use the Peter Lynch way of investing," Lee says.

A LOT OF RETAIL INVESTORS ARE NOT SOPHISTICATED INVESTORS. THEY LIKE TO JUMP IN IF THEY THINK THAT THEY CAN MAKE A QUICK BUCK.ANN LEE, NEW YORK UNIVERSITY FINANCE AND ECONOMICS PROFESSOR

ANN LEE, NEW YORK UNIVERSITY FINANCE AND ECONOMICS PROFESSOR

For context, Lynch's philosophy refers to people who "invest in what they know," such as stores and companies that might appear to be successful, or appeal to their personal tastes.

When one retail investor sees another start selling, the first tends to panic and start to sell, too. "That's why you get these wild gyrations," Lee says. 

Fact No. 3: For the first half of this year, the stock market in China was doing really well.
"There was a lot of optimism on Chinese companies in general," Lee says. She explains that many of these were high-tech internet companies that people expected to do enormously well, the way companies in Silicon Valley did in the 1990s.

Investors may have set their expectations too high; compared to what they imagined, the Chinese stock market underperformed.

Fact No. 4: When the stock market began to crash in July, the Chinese government tried to control it.

"The Chinese government did not want to see their market crash and burn," Lee tells Refinery29. In response, the government took several measures, including encouraging more firms to buy stocks and lifting limits on regulated funds (such as Social Security).

"They were doing what they can to try to stop the panic, but once panic sets in, it's difficult to stop it," Lee says. In July, Vox published a great explainer of China's big moves.

THE CHINESE GOVERNMENT DID NOT WANT TO SEE THEIR MARKET CRASH AND BURN...BUT ONCE PANIC SETS IN, IT'S DIFFICULT TO STOP IT.

ANN LEE, NEW YORK UNIVERSITY FINANCE AND ECONOMICS PROFESSOR

But the international community was hesitant to let China do its thing. Some analysts criticized the government for intervening too much, and stopped placing their trust in the Chinese markets. Others say the government didn't do enough, or made the wrong moves.

"It was almost like they were damned if they do, damned if they don't," Lee adds.

Fact No. 5: To get the stock market to go back up again, countries will have to allow China to develop their infrastructure.

When China did well, the rest of the world did well, too. Commodities-trading nations like Canada, Brazil, and Australia bolstered their economies by selling to China. At the same time, the growing Chinese middle class became an attractive market for American companies, which found new homes for their goods.

Now, Lee explains that China has pretty much outgrown itself.

WHAT YOU NEED IS ANOTHER CHINA.

ANN LEE, NEW YORK UNIVERSITY FINANCE AND ECONOMICS PROFESSOR

"What you need is another China," she says. "China basically proposed they could [accomplish] that [growth] if they could invest in the infrastructure of other countries."

Countries in Central and Southeast Asia, Africa, and Latin America that lack developed infrastructure are particularly attractive to China. But these countries have to want China's help. If they do, Lee explains, it could "cause another big economic growth cycle."

Fact No. 6: The average American does not need to freak out over a crashing Chinese stock market. A suffering Chinese economy, however, is a more worrisome story.

The Chinese stock market composes a pretty small, and somewhat niche, part of the global economy. Most people, and most big American institutions, don't deal in it.

"The fear is that if the Chinese stock market continues to be in a bear market" — a market in which stocks are falling — "and the other [countries'] financial markets also sink, this could be a drag on the Chinese economy," Lee explains.

"Then, it would start affecting U.S. companies, because a lot of U.S. companies sell to the Chinese consumer," she adds.

If Chinese consumers do not feel financially secure, they will not buy as many American products. That's when American companies (and their employees!) may begin to really feel the strain.
Source - refinery29.com

Here’s Why the Ringgit Rout Isn’t Slowing and How Bad Things Could Get

Speculation is rife that Bank Negara Malaysia is digging into its fast depleting US dollar reserves to prop up the ringgit after the Malaysian currency's drastic drop in the past 6 months. – Reuters pic, August 25, 2015.
The ringgit rout continues as markets opened today, falling to a record low of 3.08 against the Singapore dollar.

The currency is also at a 17-year low against the greenback, opening this morning at 4.2630 per US dollar,. The ringgit was pegged at 3.80 against the US dollar from September 1998 until 2005.

It is the worst-performing currency in Southeast Asia to date.

Why is the ringgit collapsing and how bad will things get? 

1. Falling Forex Reserves 

The main reason for the accelerated sell-off in the ringgit is Malaysia’s plunging foreign exchange reserves, which fell to a US$94.5 billion on August 14 from US$96.7 billion on July 31. The lower a country’s forex reserves, the less it is able to do to shore up a sinking currency. 

Malaysia’s forex reserves have fallen 19% since the start of the year, dipping below US$100 billion for the first time last month since 2010, fuelling speculation that Bank Negara Malaysia is digging into the reserves to shore up the currency. 

Meanwhile, capital outflows from the country are accelerating, to three times the size of capital investments in the country in Q1. Economists say many Malaysians are also sending their money overseas because the falling value of the ringgit. 

The reserves slid four times as fast as Indonesia, whose rupiah is the second worst-performing currency in the region. 

Malaysia's forex holdings are sufficient to finance 7.5 months of retained imports and is currently just 1 time short-term external debt, according to an August 21 statement by Bank Negara Malaysia. 

At their weakest levels during the 1997 Asian Financial Crisis, Malaysia’s forex reserves had dropped to US$20 billion. Bank Negara governor Tan Sri Zeti Akhtar Aziz has ruled out a return to a fixed exchange rate. 

2. Low Oil Prices 

Another reason for the ringgit rout is the unanticipated devaluation of China’s renminbi on August 11, which has pushed crude oil prices below its March low of US$42 a barrel to just over US$40 a barrel on August 24. 

That will have further negative implications for the Malaysian economy, says Philip Wee of DBS Group Holdings. The Malaysian government cut its 2015 GDP growth forecast on January 20 to 4.5%-5.5% from 5%-6%, while the deficit target was raised to 3.2% of GDP from 3% owing to the halving in value of oil since June 2014. 

Malaysia is the largest net exporter of petroleum and natural-gas products in Southeast Asia, with petroleum accounting for roughly 30% of national revenues. 

3. Currency Woes 

The renminbi devaluation has also “triggered currency depreciation across the emerging markets” as well as a “major equity sell-off worldwide on global growth worries,” says Wee of DBS. 

A weaker renminbi implies cheaper Chinese exports, making goods produced elsewhere in the region less competitive. 

Indeed, foreign appetite for Malaysian securities has been declining since the start of the year on the back of an unresolved political leadership crisis surrounding Prime Minister Datuk Seri Najib Razak as well as a looming US interest rate increase, which is widely expected to take place in September. 

How low will the ringgit go? 

In its latest USD/MYR forecast on August 11, DBS is expecting the ringgit to strengthen slightly to 4.01 against the USD by year end but weaken to 4.16 by end 2016. 

On the other hand, the SGD/MYR is expected to strengthen to 2.84 by year end and 2.86 by Q2 next year. – The Edge Markets, August 25, 2015. 

How to Handle Market Turmoil?

It’s hard to avoid reacting to market turmoil when you’re hit by a tsunami of dire investment warnings and falling prices on all sides. In 2008, the problem was credit risk fears and collapsing home prices – along with $100/barrel oil prices. This time the culprits are different (China economic growth worries, falling oil prices, etc.) but the effect is the same: a nasty market correction.

What should you do? It seems defeatist to say “very little” yet smart investors stick to their investment portfolios and avoid the stampede crowding the exit door. Consider the mistake some investors made when they exited markets in 2008-09. By selling, they locked in steep losses. Often they were too nervous to get back into markets as prices rebounded. The result? A double loss.

In the 2008 crash, a well-known advisor liquidated his client accounts in August 2008 – thereby saving them millions of dollars. This advisor wasn’t shy about how good he felt about his impeccable market timing. A number of years went by and this same advisor was still sitting on cash in his client portfolios! His clients began to complain they were missing out on the bull market rebound and some left him. Perhaps it’s a coincidence, but this advisor has retired from the industry.

Here are some things to keep in mind in the current market turmoil:

1. Market timing doesn’t work:

Stocks have outperformed other asset classes since tracking began – including bouts of steep declines. Investing in stocks means remaining disciplined through both good times and bad. There is no formula for consistently timing markets to buy at the bottom and sell at the top. Investors who attempt this end up with sub-par performance because they often ends up doing the opposite: buying “high” and selling “low.”

2. Free Lunches are a myth:

Higher historic returns on stocks go hand in hand with higher volatility. By comparison, we expect a lower return from bonds in exchange for lower volatility. Pursuing higher long-term returns means accepting accompanying volatility. There is no free lunch in markets.

My clients have portfolios that are based upon their unique financial and personal circumstances. Our view on this doesn’t change if stocks correct by 10% or rise by 10%. We periodically rebalance but we don’t panic buy or sell. If fundamentals are little changed, lower stock prices – if anything – make stocks more attractive. Taking a long view on investing helps avoid short-term over reaction.

3. Diversification remains key:

Diversification is the one free lunch in the investment world. The magical effects of diversification – which help smooth returns over time – persist. During a massive sell-off, stocks, bonds, commodities, real estate and other asset classes may all exhibit weakness but this is a short term phenomenon. Once excessive panic selling is behind us, the benefits of diversification again become obvious.


4. Avoid having an emotional reaction to your investments:

Your core portfolio should be sufficiently diversified (multiple assets classes with lower correlations) to give you the highest probability of achieving your goals for the reasons that are important to you. Stick to your core portfolio and look to rebalance so your portfolio remains on track.
Source - tapinto.net

Diversification - Investing in Tomorrow’s Cities

Identifying future-proof cities is essential to building a successful portfolio of commercial real estate, writes TH Real Estate’s Alice Breheny.

Global real estate is back on the agenda for institutional investors worldwide, and Australia is no exception.

On a recent visit to Australia, I was fortunate enough to speak with many local institutional teams about the opportunities real estate presents, and while all investors are at different points in their investment process, all are showing interest in the asset class.

Australia’s super funds understand that commercial real estate, both in this country and elsewhere, represents an attractive long-term investment opportunity and data confirms they have been lifting their allocations.

Data from APRA shows that the holdings of unlisted real estate of super funds with more than four members rose by 17.3 per cent to $64.3 billion over the year to the end of March.

Like their counterparts in other countries, Australian institutional investors favour commercial real estate, and retail property in particular, because of its low volatility, long lease terms and diversity of tenant base.

Of course, in real estate investing, as with all investing, it is important to ensure that the portfolio is properly diversified.

So, what does proper diversification mean? It means spreading a portfolio across cities that are most clearly beneficiaries of the megatrends that will drive investment performance over the long-term – these including urbanisation, rising middle classes, ageing populations, technology and the shift of economic power from the West towards Asia.

Economic cycles do have an impact on performance in the short term. However, it's megatrends that will matter much more over the long term, which is the time horizon that matters far more to many institutional investors.

Future-proof defined

That is not to say that tactical real estate fundamentals – such as demand and supply over the next two years or so – do not matter.

In fact, at TH Real Estate, we take them into account, along with the effects of the various megatrends, when we look for cities that offer the greatest potential for future-proof investment.

In this context, ‘future-proof’ means that the investment is unlikely to be affected much by fluctuations in the global economy or the national economy in which it is located.

In assessing the future-proofing of cities, we consider a number of qualities that make them attractive to people and occupiers, today and in the future. We assess cities on the basis of their current size, wealth, age profile, adoption of technology and way of life. We also consider the potential for growth in each of these aspects. 

Of course, traditional measures of real estate attractiveness also matter. We look at several hundred cities globally, and assess each of them on the basis of real estate liquidity, transparency, income security and volatility.

This approach means that we can concentrate our research efforts on a small minority of cities that are particularly attractive. In Europe, for instance, we focus on fewer than 50 cities out of a total of 200 for which we have data.

We think that these are the cities that have the greatest ability to attract talent, tourists and international tenants, on the basis of their long-term fundamentals. 

We then group the cities in three categories. Naturally, we want to concentrate on 'defensive growth cities' which, according to our analysis, look attractive now and in terms of their future prospects.

Examples of these include London and Munich. Of course, it would be wrong to ignore 'defensive cities', which have very strong fundamentals today. An example of these would be Paris.

On the other hand, there are some cities which, in terms of their traditional real estate fundamentals – such as illiquidity, lack of transparency or small market size – are clearly unattractive now, but have such high growth rates they cannot be ignored.

These are the growth cities, whose place in the hierarchy should change markedly over the next 20 years.

As economic output and/or consumer demand in these cities grows, perceptions of them as real estate markets should change for the better – with the result that rents rise and yields fall. An example of one such 'growth city' is Istanbul.

Diversification in practice

Once we have categorised cities as defensive growth cities, defensive cities and growth cities, we classify them as Tier 1 and Tier 2. This relates to their size and the scale of opportunity that we can identify, rather than their attractiveness.

Common sense might suggest that we would bias our portfolios towards opportunities in Tier 1 defensive growth and defensive cities.

However, as investors, we also want to maximise the benefits of diversification in terms of location, sector and drivers of demand.

The largest real estate markets – such as London and Paris – are typically closely correlated, as they are driven by financial and business services. This means that they do not provide the normal benefits of geographical diversification.

By looking for a balance of occupiers in terms of industry, we seek lower volatility in rental growth and an avoidance of over-dependence on any one sector.

Investments in cities that are dominated by financial and business services, for instance, can be complemented with investments in resource- or commodity-led cities.

Very often, it is the Tier 2 cities and the growth cities that offer the best diversification potential. This is why we think it is important to consider them for inclusion in commercial real estate portfolios.

Investing across different real estate sectors can offer further benefits. Not all of the cities that we are focusing on are appropriate for all sectors.

Quite often we target just one sector, and actively avoid the rest. In general terms, the Tier 1 cities, such as Barcelona, should be attractive for all sectors, while the Tier 2 cities, such as Bratislava, are usually attractive for retail or logistics.

In growth cities, the opportunities arise mainly in retail, because their expansion is usually underpinned by rising consumer spending or tourism.

We build our portfolios using a city-by-city approach that looks at long-term megatrends, as well as traditional real estate fundamentals. We look to achieve the right balance of risk and diversification, while taking advantage of short-term pricing opportunities.

In this way, we look to produce above-average returns, lower-than-average returns and moderate downside risks for our clients over the long term.

Source - investordaily.com

Templeton Bets on Malaysia as Hasenstab Sees Slump Overshot

Franklin Templeton, whose contrarian bets made profits in Ireland and face losses in war-torn Ukraine, has been buying debt in Malaysia as global funds flee.

The San Mateo, California-based money manager which oversees about $855 billion, has over the past two years become the largest holder of Malaysian government local-currency bonds due in the next 30 months among funds that make their quarterly filings public, data compiled by Bloomberg show. Various of its funds added an aggregate 9.64 billion ringgit ($2.3 billion) this year to holdings maturing from September 2015 to February 2018, bringing the firm’s total claim to 23.1 billion ringgit, the data show.

Malaysia’s currency and bonds are slumping as probes into donations to Prime Minister Najib Razak cloud the outlook for an economy rocked by plunging oil prices and a selloff in emerging markets. PineBridge Investments LLC said this month it has recently trimmed Malaysian sovereign bonds and the cost to insure the debt has soared amid the scandal surrounding state investment company 1Malaysia Development Bhd.

“While the Malaysian market has come under extreme stress, we still believe in the long-term value of our investment in the country,” said Michael Hasenstab, chief investment officer for Templeton Global Macro, which oversaw more than $170 billion as of June 30. “The Malaysian economy is far stronger today than it was” during either the global crisis of 2008 or the Asian crisis of the late 1990s, he said.

Malaysia’s Finance Ministry didn’t immediately respond to requests for comment.

Ukraine, Ireland

Hasenstab’s trades have helped him become one of the world’s most successful bond fund managers. He helped trigger a turnaround in sentiment for Ireland -- and made billions of dollars -- by buying the nation’s debt in July 2011, eight months after the country entered an international bailout. Hasenstab met with Ukraine’s Finance Minister Natalie Jaresko this month and is trying to avoid a 40 percent cut to the billions of dollars in Ukrainian government debt his funds hold.

Templeton started to build its position in Malaysian local government bonds more aggressively at the beginning of the year, data compiled by Bloomberg show. The asset manager’s biggest exposure is to notes due next month. The fund data compiled by Bloomberg is based on numbers for periods ended either June 30 or July 31, depending on reporting timetables.

On Course

The Templeton Global Bond Fund, managed by Hasenstab, has had an average annual return of 7.3 percent over the ten years ended July 31 and a loss including reinvested dividends of 1.48 percent this year through July, the firm said. In net asset value terms, it has fallen 6.2 percent in 2015, according to data compiled by Bloomberg.

Both Moody’s Investors Service and Standard & Poor’s are standing by their respective A3 and A- ratings on Malaysia as they expect the government to stay on course with its reforms.

The yield on Malaysia’s five-year government bond rose to a more than six-year high of 4.05 percent on Aug. 17 and ended today at 4.03 percent. The cost of protecting the country’s debt against nonpayment rose to 196.5 basis points, the highest since October 2011, CMA tick-by-tick data signals. The ringgit has slumped 17.6 percent this year against the dollar, the worst performing Asian currency.

“We believe the current movement in the exchange rate has overshot fundamental value,” Hasenstab said.
Source - bloomberg.com

Kazakhstan, Malaysia Boost Gold Reserves; Colombia Cuts Holdings

Kazakhstan increased its gold reserves for a 34th month in July as Malaysia bought more bullion, according to the International Monetary Fund. Colombia reduced holdings.

Kazakhstan purchased about 2.49 metric tons to take its stash to about 208.14 tons, while Malaysia added 0.62 tons to 37.9 tons, data on the IMF’s website show. Colombia sold 64 percent of its gold reserves to own 3.76 tons.

Gold tumbled to a five-year low last month and rebounded in August after the Federal Reserve said it needs more evidence of strength in the U.S. economy and a pickup in inflation, signaling a possible rate increase in December instead of next month. China devalued its currency on Aug. 11, shaking up markets and boosting the appeal of haven assets, such as gold. The world’s biggest consumer said Aug. 14 it raised gold reserves to about 1,677.4 tons compared with 1,658 tons announced a month earlier.

“While we expect a pick-up in central banks’ buying in the second half, we’re forecasting overall demand for the year to be broadly flat from 2014,” Simona Gambarini, commodities economist at Capital Economics Ltd., said in an e-mail Aug. 21 before the release of the data. “The case for emerging economies to diversify their reserves remains strong.”

The Malaysian ringgit weakened to a 17-year low on Aug. 21 as falling oil prices worsened Malaysia’s export outlook amid an emerging-market selloff. The Kazkhstani tenge tumbled 22 percent to a record low versus the dollar after Central Asia’s biggest energy producer relinquished control of its exchange rate on Thursday.

Gold Price
Gold for immediate delivery rose as much as 0.4 percent to $1,165.48 an ounce and was at $1,162.65 at 7:54 a.m. in Singapore, according to Bloomberg generic pricing. The metal is down 1.8 percent this year.

The Fed will still raise U.S. interest rates this year and that’ll hurt gold, said Barnabas Gan, an economist at Oversea-Chinese Banking Corp. The top-ranked precious metals forecaster kept a prediction that bullion will drop to $1,050 at the end of the year.

Central banks remained net buyers, increasing purchases by 11 percent to 137.4 tons in the second quarter from the first three months this year, according to the World Gold Council, an industry group made up of miners of the metal. They’ll probably buy 400 to 500 tons by the end of the year, the London-based council estimates.

Russia already announced it increased reserves at a slower pace in July. It now holds 1,288.2 tons compared with 1,275 tons a month earlier, according to the IMF data. The country has more than tripled its hoard since 2005.
Source - bloomberg.com

How Does The Tumbling Ringgit Directly Affect You?

By Iris Lee

Summary

"A rising or sliding Ringgit affects different groups in our economy differently. A stronger Ringgit against the currencies of our trading partners would typically result in cheaper imports for our consumers, and more expensive exports to foreign buyers. When the Ringgit falls, employment in export-related industries will likely benefit, as demand from abroad increases."


The unthinkable has happened. Ringgit has fallen beyond the crucial 4.0000 level in late morning trade against the US dollar (at the time of writing). At 11.03am on August 12, 2015, the Ringgit was at 4.0060 to the US dollar, the weakest since the Asian financial crisis in 1998.

Fears about a weak Ringgit has reached a fever pitch, and some Malaysians are worried and angry about the situation. But are these worries and anger justified?

With the devaluation of China’s yuan for the second consecutive day, markets and currencies were sent reeling, and Malaysia was not spared. As the second biggest economy in the world, China’s economic slowdown had spurred the central bank to devalue the currency to export its way out of the situation.

However, the yuan is not all to blame for the Ringgit’s downward spiral. On a year-to-date basis the Ringgit, the worst performing Asian currency, was down 13.33%. This was followed by the Indonesian rupiah, South Korean won and Thai baht at 9.88%, 8.35% and 6.99%, respectively.

A rising or sliding Ringgit affects different groups in our economy differently. A stronger Ringgit against the currencies of our trading partners would typically result in cheaper imports for our consumers, and more expensive exports to foreign buyers.

This means a strong Ringgit will benefit the local consumers buying imported goods, but bad for local exporters selling their products internationally. Depending on various factors, such as capacity utilisation and unemployment, the circumstances may make a recession worse.

When it comes to the sagging Ringgit, there are also pros and cons. When the Ringgit falls, employment in export-related industries will likely benefit, as demand from abroad increases. However, the higher domestic prices likely associated with export products due to the increased demand will reduce that benefit to some degree, and the higher prices for imports will reduce it even more.

Here are four different groups in the economy that are directly affected by the sliding Ringgit, either negatively or positively, and what they can do to protect themselves from the imploding currency:

1. Domestic producers

Domestic businesses who create and sell goods and services, where parts and components are acquired, manufactured and sold domestically, will likely not feel any direct impact of a strong or weak currency. For example, restaurants offering local cuisine and traditional massage centres.

As long as the business expenses are incurred locally, such as acquiring manufacturing materials and talent are all done within the country, there should not be any direct impact to the bottom line.

However, some domestic producers can be negatively impacted by a weak currency if the goods and services they sell locally, partially or entirely originates from a foreign economy. For example, if you purchase parts or materials in US dollar, you will probably see a significant hike in your production cost.

Some of these companies include vehicle manufacturers who may be importing parts and components from countries like Japan and South Korea.

EITA Resources Bhd, which imports steel, copper and electrical components from Germany, China and Japan to manufacture its elevator systems, said raw material prices have risen.

“It is more than a double whammy and outlook is definitely not good,” Fu Wing Hoong, the company’s group managing director, told The Business Times. “Prices for our products will have to be adjusted.”

Even Tenaga Nasional Bhd (TNB) does not escape the fluctuations in the Ringgit with its foreign currency borrowings. As of February 28, 2015, TNB had debts totaling RM25.6 billion, of which 11.3% or RM2.9bil, were denominated in US dollars. A sliding Ringgit will increase its foreign debt obligations.

Other industries who suffer in this economic climate are the airlines and telecommunications industry.

Malaysia External Trade Development Corporation (Matrade) chief executive officer Datuk Dzulkifli Mahmud advised SMEs and exporters to use more local raw materials whenever possible to reduce production costs and losses from foreign exchange rates.

Other ways to manage production cost better was to hold off buying any capital goods like machineries and equipment from abroad, especially when buying from an economy that has a stronger currency compared to Ringgit.

2. Local exporters

The selling of goods and services occurs not just domestically, but internationally as well. Malaysia was ranked the 23rd world’s largest exporting country in 2014.

Those who create and sell goods and services to foreign consumers in other economies will probably benefit from a weak currency.

Local exporters are positively impacted by the weakened Ringgit due to the lower cost of production, resulting in likely increase in the demand from abroad. What this means is, they pay for cheaper production in Ringgit, while selling products in higher valued currency, like US dollar, netting in higher profit.

Furthermore, if more foreign consumers can afford what domestic producers are selling, then there will be more sales. Simply put, a weak Ringgit benefits domestic producers selling to foreign consumers.

Glovemakers in the country will most likely benefit from this as their input costs are sourced and denominated local, and exported in stronger currency.

According to Lim Wee Chai, chairman of Top Glove Corp., a weaker currency makes Malaysian goods cheaper overseas and boosts the value of exporters’ overseas sales at companies such as Top Glove.

“Our margins will be positively impacted as exports are US dollar denominated,” Lim said. “However, we cannot depend too much on the currency as it will fluctuate.”

In a report on The Star in July 2015, Malaysian exporters were urged by Matrade to consider hedging the level of Ringgit back then, which was considered the best level against the US dollar, besides increasing productivity by using local raw materials.

3. Foreign investors

A strong or a weak currency matters most importantly to export and import of the economy as the prices change in foreign currencies. However, people think the similar logic can be applied to capital flows in the economy as well. The truth is, a strong Ringgit does not necessarily mean more foreign capital.

A foreign investor can get back his investment at the same value, if the currency remains that strong or weak. In other words, as long as the currency rate does not dip from its initial rate at the time of investment, it does not matter to the investor if the currency is strong or weak.

What matters is whether the currency strengthens or weakens during the investment period. For example, if an American investor invest into Malaysia now, he/she will see profit if the Ringgit appreciates. However, if Ringgit weakens later on, the investor would see a loss.

The currency depreciation may attract investors who see costs of doing business in the country getting cheaper, said Jalilah Baba, president of the Malaysian International Chamber of Commerce & Industry.

With that said, it doesn’t all just hedge on the Ringgit’s value, foreign investment sentiment is also affected by other factors. Although Malaysia’s medium-term prospects seem attractive, investment sentiment towards Malaysian assets has been overshadowed by domestic political developments, said Khoon Goh, a senior foreign-exchange strategist at ANZ.

International investors are selling Malaysian stocks with foreign funds pulling out RM11.7 billion in shares. Nomura, a Japanese financial holding company, noted that foreign ownership levels of equities are less than 20% of the total, a multi-year low and the lowest of several regional peers.

The weak sentiment is likely to persist as the political landscape in the country will most likely remain unchanged.

4. Consumers

With the latest bad news to hit Malaysians, the weakening Ringgit has left consumers with a smaller purchasing power. With GST implemented, the downward slide of Ringgit is considered a double whammy for the already financially struggling population.

Consumers are discovering their money isn’t going as far as it used to, eroding confidence at a time when the economy needs it the most.

Malaysians looking to purchase and consume goods and services from foreign producers will have to pay more. This does not just apply to imported goods, but also domestically produced items that use parts and components or even expertise from foreign economies.

To make matters worse, a weaker currency can drive inflation up when economies import goods from countries with stronger currencies. It will also make travelling overseas a bad idea.

To safeguard their finances, some Malaysians have been stocking up on US and Singapore dollars which are seen as safer and more stable currencies as speculation on the continual weakening Ringgit continues.

Spectrum Forex in Nu Sentral revealed that they currently face a Singapore dollar shortage. However, elsewhere, there are many who were selling their US bills too.

Other ways one can protect oneself from the weakening Ringgit is by investing in a currency-hedged unit trust fund, or invest in an exchange-traded fund. These funds remove the risk for you, so you only have to worry about stock market returns.

Whether you’re an average investor who wants to mitigate currency risk or a more experienced one who wants to take advantage of currency fluctuations, the forex world is only for those who can stomach risk.



The Government has no plans to peg the Ringgit to the US dollar, like what was done during the 1997 Asian financial crisis.

The drastic measure of pegging the Ringgit would only be beneficial if Malaysia was a low-cost production country, said Wan Suhaimie Saidie, the senior vice-president of research at Kenanga Investment Bank. Since then, we’ve moved towards becoming a higher skilled industry.The economic situation is markedly different from the last time we pegged our currency in 1998.

Bank Negara Malaysia’s governor, Tan Sri Zeti Akhtar Aziz assured, in a Wall Street Journal report, that the country’s foreign-exchange reserves remain significant and the current account remains in surplus.

However, according to a report by The Edge Markets on August 10, the country’s international reserves have fallen to US$96.7 billion as of July 31, from US$100.5 billion on July 15 – the lowest since September 2010.

The central bank has been struggling to slow the decline by selling dollars and buying Ringgit since June in an attempt to stem the currency’s slide but this can only be a temporary measure.

There doesn’t seem to be a light at the end of this downward spiraling tunnel that our currency is currently in. Nomura doesn’t appear to expect the Ringgit to rise any time soon neither does anyone else. It would be prudent for Malaysians to tighten their belt further as we may be in for a long ride on the tumbling Ringgit.


Source - imoney.my

Don’t Panic Over Ringgit Depreciation, Says Macro-Economic Analyst

KUALA LUMPUR: Contrary to the opinion of many that the country is on the verge of an economic collapse due to the weaker ringgit, independent macro-economic analyst, Professor Dr Hoo Ke Ping told The Mole that such negative sentiment was not based on facts.

Hoo substantiated his views by presenting several points to prove that the current ringgit depreciation is actually not the same as experienced during the 1997-98 Asian Financial Crisis, which then had affected Malaysia and and other emerging economies in the region.

“One of the ways to determine how bad our economy is doing is by comparing its current performance with the worst period we have ever performed.

“So in comparison with what we endured during the 1997-98 Asian Financial Crisis, this is just a minor economic setback.

“Mind you that in 1998, our market share collapsed, it was cut down to more than 70 per cent whereas currently it is only down to 15 per cent.

“Also, at that time our foreign debt is approximately US$160 billion and we only have around US$ 20 billion reserve…now our total foreign borrowing is not even US$ 35 billion while our reserve is at best, US$ 99 billion,” said Hoo.

In terms of domestic debt, Hoo explained that while our current debt is relatively high but it is still less than 100 per cent to our gross domestic product (GDP) ratio whereas in 1998 such debt had easily exceeded 158 to 200 per cent to GDP.

Hoo also clarified to The Mole that there is no reason for Malaysians to panic because the current currency depreciation has not escalated into a regional crisis.

“Unlike now, in 1998 there was a huge regional crisis. Several countries almost went into bankruptcy they are South Korea, Thailand, Indonesia and even Hong Kong which was known at that time for having a good economic governance.

“Even Japan too almost went bankrupt in June 1998…so back to the present situation, do you see any other countries within our region that is facing bankruptcy? No.

“So if there is no regional crisis implicating us and our neighbours, there is actually no reason for us to panic. Despite the odds, our economy are still strong,” he said.

He also said that regional crisis back then was an international plot to sabotage the Asian economy whereby “currency speculators, at that time, had combined to whack one currency after another.”

Hoo insisted that back in the late 1990s, currency speculators such as George Soros and James Rogers cooperated with former United States Treasury Secretary Lawrence Summers to destroy the economy of any country that wanted to replace the USD$ as the main global currency.

“Among the list of countries that these economic saboteurs were out to destroy were Malaysia, Indonesia and Japan.

“You see, at that time Mahathir (Malaysian former prime minister Tun Dr Mahathir Mohamad) along with Suharto (Indonesia former president) and Hashimoto (Japan former prime minister Ryutarou Hashimoto) wanted to form the Yenzone and used it as the third global currency.

“Therefore, Summers was allowed by the US government to walk with the speculators and whack not only Malaysia and Indonesia but also Japan.

“Japan almost went bankrupt until Ryutarou called Clinton for help. So today there is no such plot and in contrast to 1998, everyone is economically friendly with each other…mainly to keep China at bay,” Hoo said.

In terms of political crisis capable of upsetting the ringgit, Hoo claimed that though Malaysia’s current political scenario is “lively”, it is not as severe as it was in 1998.

“(Datuk Seri) Anwar Ibrahim who was at that time the finance and deputy prime minister tried to overthrow Mahathir with the help of Madeleine Albright (US former secretary of state).

“So Mahathir had to take control and bring order to the house by sacking Anwar which inadvertently sparked more political unrest.

“Such unrest was one of the primary factor that led to the downfall of ringgit to RM4.71 to US$1 in 1998.

“But today we don’t have any Madeleine Albright to create another Anwar. The only thing we have right now is John Kerry (current US Secretary of State) that is shaking Najib’s hands…and even Obama (US President Barrack Hussein Obama) is on good terms with Najib.

“Hence, there is actually no global political power that is trying to upset the ringgit right now.

Hoo also holds the opinion that foreign and local publications and politicians who are pessimistic of Malaysia’s economic and financial future can “keep on harping on their gloomy economic outlook but as far as the statistics are concerned…we are doing fine.”

Prominent journalist and blogger Datuk Ahirudin Attan, was also optimistic on the well-being of the ringgit.

In his latest posting, ‘Oh no, where’s our Ringgit?!’, Ahiruddin reposted Bloomberg’s report that listed the top ten troubled currencies in the world.

“Our naysayers, of course, will find it very hard to accept the exclusion of the ringgit in Morgan Stanley’s latest Troubled Ten Currencies.

“The fact is, we are looking ok. The key to our being ‘ok’ is the current account deficit and our current account deficit has been well managed by the government over these few years and has been consistently coming down,” Ahiruddin wrote.

According to Bloomberg’s report, the ten troubled currencies are: Taiwan Dollar, Singapore Dollar, Russian Ruble, Thai Baht, South Korean Won, Peruvian Sol, South African Rand, Chilean Peso, Colombian Peso and Brazillian Real.


Source - malaysiandigest

Gold Price Forecast: Forbes Says “Now is a Great Time to Buy Gold”

In spite of the recent decline in precious metal prices, today is one of the best times to buy gold. At least, that’s according to Forbes contributor Henry To.

Gold is “an attractive long-term investment,” To writes. “With gold’s recent decline to below $1,100 an ounce, I believe today is one of the best times to own gold.” (Source: Why Now Is A Great Time To Buy Gold, August 17, 2015.)

To outline three reasons for his bullish gold price forecast.

First; global gold mining supply is expected to decline significantly over the next few years. According to the World Gold Council, during the second quarter, global mine supply declined by four percent to 781.6 tons on a year-over-year change. Meanwhile, global gold exploration and development fell to a new low—declining by more than 60% since the late rally in 2011. (Source: World Gold Council, last accessed August 17, 2015.)

“Because of this decline in gold mining capital expenditures over the last several years, I expect annual global mining production to decline by 7% to 10% over the next several years, which in turn will support gold prices,” he added.

Second; despite the strong U.S. dollar, global monetary policy remains uncertain. Although the Federal Reserve has repeatedly signaled that the interest rate will rise this year, the latest turmoil in the global economy may force policymakers in the Fed to reconsider their decisions.

Other countries such as Canada and New Zealand, as well as the European Central bank, continue to use their money printing program in order to get their respective economies to grow. In a stunning move, China devaluated the yuan to help its struggling economy.

To stated, “I believe a diversification of the world’s central bank reserves into the yuan (even just a 10% allocation) will in all likelihood result in a weakening of the U.S. dollar, which will in turn increase the attractiveness of gold as an investment or diversification tool for U.S. investors.”

Third; Mr. To foresees that Chinese and Indian gold demand will rebound. The report from the World Gold Council indicated that the global jeweler demand decreased by 14% during the second quarter compared to the same period last year.

“I see the second-quarter decline in Indian gold demand as temporary. With gold prices now solidly below $1,200 an ounce, I expect Indian gold demand to pick up substantially over the next several quarters,” he explained.

Mr. To believes that gold is a solid long-term investment. He thinks in this uncertain global economy gold investing ought to be one of the best alternatives for investors. Along with Mr. To, gold bulls have a positive gold price forecast in 2015.

Is Gold About to Hit $5,000?

Mr. To isn’t the only one bullish on gold. Lots of savvy investors have noticed the Federal Reserve’s reckless monetary policy and are starting to diversify their portfolio into hard assets.
Source - profitconfidential.com

Five Mistakes That Jeopardize Your Financial Freedom

Many individuals want to be financially free. However, their dream may not materialise if they make any of these five mistakes.

It is not the income that brings financial freedom but it is the balance between income and expenses, which helps you to attain it. Managing money is an art and science. People work hard to fulfil their aspirations but few mistakes may jeopardize all their efforts. Despite of having adequate income people find it difficult saving for their future goals. Anxiety steps in when they face sudden unexpected expense. 

Here are the most common mistakes which become an obstacle in achieving financial freedom. 

1. Poor cash flow management 

Cash flow management refers to managing in and out flow of money. People simply earn and spend without looking into their future financial goals. If you are poor at managing your cash flow then chances are there that your bank balance may become zero much before the end of month. Lack of discipline may lead to over spending. Cash-flow can be managed to the large extent by writing monthly household budget. Once you write your household budget you will be able to identify and control your not-so-important expenses. 

2. Living beyond means 

People tend to live in the present rather than worrying about their future. Although enjoyment is an integral part of life, yet it should not be achieved by jeopardizing our future. We buy things which we may not specifically need. Human beings are susceptible to societal pressure which make them do things which can adversely affect their money management. We seek acceptance from society leading to impulsive purchases which will give you instant gratification but which may be the cause of financial dissatisfaction later on. This behaviour can be controlled by differentiating between needs and wants. Money should be judiciously spent on satisfying wants only after all needs including saving and investing for the future are properly met. 

3. Overburden of EMIs (Equated monthly instalment) 

Loan is a necessary evil. In the current economic conditions, rising of inflation, stagnant income levels, loans have become necessity to meet certain needs. Loans should be taken only to satisfy needs but not wants. Home loan and even vehicle loan to some extent can be deemed as a necessary loan whereas personal loans for utilization of going on vacations should be deemed as unimportant. The interest rate on personal loans is much higher compared to secured loans leading to further strain on cash flow. How much you borrow, it should be determined based on your repaying capacity. EMI should be such that it does not cause unnecessary strain. Use credit card only if you can pay the bill before the due date. Any outstanding on credit card may become a financial burden for you due to high interest rate applicable on it. 

4. No efforts to increase income 

Inflation causes a dent in our cash flow management. Inadequate funds are the major reason for not saving and investing for the future. In the absence of adequate inflow we have to compromise on our savings and investments to take care of our fixed and discretionary expenses. We must think of improving our income if it is not adequate. We must upgrade ourselves to earn more. Upgradation can be in terms of upgradation of job, upgradation of knowledge, exploring new avenues to earn money. The advent of technology has opened new doors of earning income. We can explore new opportunities while still carrying on with our primary job. 

5. Improper asset allocation 

Asset allocation is the implementation of an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor's risk tolerance, goals and investment time frame. Financial goals if realistic can be achieved through proper asset allocation. Poor risk tolerance and inadequate knowledge of financial instruments cause improper asset allocation. Overexposure in traditional saving schemes like fixed deposits and small saving schemes limits the scope of wealth creation. Improper asset allocation is the major cause of jeopardizing our financial freedom.

Source - moneycontrol

What Makes an Investment Portfolio Diversified?

Any typical investor holding a portfolio of assets, willing to achieve the maximum possible return for a given level of risk, will undoubtedly wish his/her portfolio of assets to be as diversified as possible.

But what does diversification really mean? The more, the better? We have all heard the saying of “putting your eggs in one basket” as a means of trying to visualise the concept of diversification – but in investment terms, how can we achieve the optimal diversified portfolio of assets?

Portfolio diversification is the strategy used by investors (of all types – from individuals to asset managers and hedge fund managers) to attempt to minimise and eliminate the exposure of the overall basket of assets to company-specific risk as well as even out the short-term effects of the performance of a particular asset class (such as bonds or equities) on the overall performance of a portfolio.

So in practice, portfolio diversification can be achieved through a number of strategies, or rather portfolio allocations. A portfolio is said to be diversified if it gains exposure to more than one asset class.

For example, a portfolio with 100 per cent allocation to bonds or 100 per cent allocation to equities cannot really be considered to be diversified; if the equity market goes down, a portfolio with 100 per cent allocation will be impacted by an equity downturn whereas if it had some sort of allocation towards bonds, the impact would have been somewhat limited, as exposures to different asset classes serve to cushion against market movements, both on the upside as well as on the downside.

Diversification by asset class is one of the key factors of diversification. There are also a number of key ways of diversifying a portfolio of investments, namely achieving diversification by adding 

• currencies, 
• diversifying exposures to sectors (or industries), 
• diversification by geography, 
• diversification by equity type (blue chip, small cap or micro-cap),
• diversification by investment style (aggressive, moderate, cautious appetite for risk), 
• diversification by interest rate risk (bonds having short or long duration, with duration being the exposure of a bond to interest rate fluctuations), amongst many others.

The key to diversification is that the underlying constituents of a portfolio are not highly correlated with each other. Research and studies conclude that assets which are not highly correlated can be considered to complement each other and on a risk-return basis will perform better during adverse market conditions.

One important thing, which investors tend to oversee, is that the correlations between asset classes is dynamic and is continuously changing; sometimes the size of change can be relatively large and could impact asset allocation decisions. The desired level of portfolio diversification will ultimately depend on an investor’s tolerance for risk, investment horizon, as well as targeted expected return.

A well-diversified portfolio should hence be diversified within asset classes to the extent that specific risk has been reduced. Asset Allocation strategies, in the form of mutual funds (collective investment schemes) offer investors the ideal investment vehicle to achieve their investment goals without the need of individually allocating and diversifying assets whilst serving as an optimal tool of gaining exposure to a wide array of asset classes, in a more manageable way than if the investor had to take key important asset allocation decision by him/herself. 

Source - timeofmalta.com